Balyasny, who has a calm demeanor and precisely answers questions, has had a front row seat to all the changes. His own firm started with $40 million in assets under management.
Balyasny said during a recent interview at the firm’s New York office that his firm's growth is “governed by our ability to put up consistent alpha returns ... and then you earn the capacity to grow a little bit again the next year."
To him, it makes sense that multistrategy funds could become the largest percentage of the industry, “similar to what you see in private equity and other businesses, where there’s a lot of consolidation and most of the AUM eventually goes to half a dozen firms that are good at managing strategies as opposed to running one strategy,” he said.
Balyasny said his focus is on putting up good returns, and part of that is conducting capacity exercises several times a year. “We’re closed, and we’re really trying to optimize the return on the capital that we have. Whenever we have some gap between where we’re modeling out the capacity and what we’re running, then we open up for a little bit,” he said.
Balyasny’s flagship Atlas Enhanced Fund was up 5.5% through June, according to numbers viewed by P&I.
The PivotalPath multistrategy index was up 6.1% through June.
Atlas Enhanced returned 2.7% in 2023, 9.7% in 2022, 7.8% in 2021 and nearly 34% in 2020. The firm had a bad year in 2018 when it lost over 6%. It has returned an annualized 12% since inception in January 2006.
Concern over leverage
One concern institutional investors have raised about multistrategy funds is the amount of collective leverage they use and what would happen if a large-scale deleveraging event occurs.
Balyasny said there is a risk, but he thinks about it more as a correlation risk. “There’s no investment strategies that I’m aware of that doesn’t have correlation to multiple other shops doing the same strategy,” he said.
Diversifying portfolios by strategies, positions, teams, and tight risk constraints are key, he said, pointing out that within the firm’s macro strategy there are 10 different substrategies.
“There’s no foolproof answer to it,” he said. “You have to risk-manage, and you have to react to what’s going on in the markets. From an industry perspective, everyone has pushed out their liquidity (with longer lockups). So, I think all the larger firms have multiyear liquidity. So even if there is a real industrywide drawdown shock at some point, which I’m sure there will be someday, the ability of firms to weather that is much better today than it was before.”
Finding and paying for talent
Fifteen years ago, when hiring for equity portfolio managers, finding a qualified person who ran $300 million was great. Now “you’re hiring folks that run $3 billion. So, of course, they’re going to get paid more if they do well,” Balyasny said.
Last month, Bloomberg reported that Balyasny is set to spend over $200 million to recruit senior money managers who may have worked at rival firms including Citadel, Millennium Management and Point72 Asset Management.
Balyasny says his firm typically spends about 1% of assets under management annually on talent acquisition.
“In percentage terms, the amount that we spent on comp has been very consistent over the years,” he said. “Maybe it’s gone up a tiny bit, but very, very consistent. But the fund is five times bigger than it was 10 years ago.”
He added, “We’re not the biggest player in our corner of the industry … We’re never going to win because we’re going to pay a lot more than a larger competitor. They can always, and in most cases do, pay a lot more than we do.”
Balyasny typically has two to three job interviews scheduled a day during the fourth and first quarter of the year, he said.
Recruiting is “essential to business building and just making sure we have the best possible people in every seat. So, I spend a lot of time doing that,” he said.
Personal journey
At 18, Balyasny got his foot in the door in finance with a job at a brokerage firm in Chicago. “I knew I wanted to invest and trade,” he said. And by his early 20s, he ran a small group within the brokerage firm.
“If we can find somebody who, in addition to that (being a good portfolio manager in their own right), really has business-building DNA, where they can build a significant team over time, maybe they can run a division, maybe they can run an office, maybe they can run a strategy, that's really significantly more upside,” he said. “And so, we look for ambition and evidence of that … even if it’s at smaller scale.”
Balyasny focuses a lot on the psychology of individuals to understand if they have a good mix of confidence and humility to take meaningful risk but also have a flexible mindset.
“We look a lot for people that have overcome difficult challenges and circumstances over time, so that they’re resilient,” he said, adding, “markets are tough.”
The day Balyasny met P&I he was up at 5:30 a.m., and after dropping his kids off at their first day of school, he had an equities portfolio manager meeting, attended a trading and markets discussion, an investment committee meeting, two portfolio manager catch-ups, and then trading until the market close and a business meeting. It was unusual that he did not have a recruiting interview that day, he said.
“When we started, the vast majority of my business-building was directly trading in the markets,” he said. “Now I still do that, but I’d say the bigger influence is on working with the leaders of different areas to build businesses within the business.”
'Very interesting' time for stock picking
Balyasny’s roots are in long/short equity investing, and today that makes up 40% to 50% on a risk-adjusted basis of the firm’s investing depending on the opportunity set, he said.
“Stock picking right now is very interesting,” he said, adding that investors can add a lot of value when there’s a lot of change happening.
“Between all the AI and technology changes, on the one hand, all the macro, interest rate, recession-no recession changes, and the election now, you’re going to have a lot of change,” he said. “And so every day there’s fresh data points, there’s a lot of surprising news, there’s a lot of technology developments.”
Balyasny said it’s “very hard” to make large bets on the U.S. election because of the inherent uncertainty around the result and how markets will react to the outcome.
“People might take slight tilts here and there if they feel like it’s a somewhat asymmetric outcome in a particular investment. But, overall, we just try to kind of stress manage to make sure we don't have too much tail risk in any particular outcome,” he said.
In the near term, Balyasny thinks that AI will be a strong research assistant for investors.
“The further out levels, I think, are harder, right, because at some point can the AI become smarter and figure out which questions to ask, ask the questions and come up with its own conclusions which are actually worthwhile? You would think the answer to that eventually is yes, but we have no idea if eventually is in a couple years or in 20 years or in 200 years,” he said.
As new iterations develop, Balyasny imagines AI could go from an assistant to a good junior analyst and maybe even one day a senior analyst.
“I don't know how long it’ll take to be a good portfolio manager. My guess is a long time,” he said. “Because the rules for what makes stocks go up and down, outside of extreme circumstances, you know, change quite a bit.”
Amid all the change, institutional investors have the same concerns they have had historically, Balyasny said.
“Being an institutional investor is a challenging thing, because you're trying to constantly find really uncorrelated alpha at a meaningful enough scale to make a difference to a large pool of capital. And that's hard to do,” he said. “There’s just not that many great sources of alpha that have lots of capacity. And so, you know, I think they’re always concerned rightly so about the correlation in their portfolios.” About 70% of Balyasny's assets are managed for institutional investors.
Finding investments that don’t have easily replicated factors and are not limited by capacity is difficult, he said.
“We’re doing that all the time — trying to find new teams that are bringing something different to the table, and trying to build out businesses and infrastructure around them to create a sustainable moat around their strategies,” he said. “And you know, we do that with the benefit of several thousand people, and it’s still very hard.”
Fees and cash hurdles
In recent months, a large number of institutional investors and consultants have signed on to a letter demanding cash hurdles with hedge fund fees. Multistrategy funds have employed a pass-through fee structure where managers pass along expenses to their underlying investors.
Balyasny says investors want to make sure they are aligned with their managers.
“I think the pass-through structure is the most aligned structure that there is because the management company doesn’t really make any significant money until everyone else has been paid. And so you’re very aligned with wanting to have the best possible teams in every area, but you don’t want to overpay them because you’re just cutting your own compensation, your own ability to deliver good net return,” he said.
He added, “it governs your capacity because the vast majority of your earnings are from your net incentive fee. And so if you’re just going to take on a lot more assets, you’re just going to make less money at the end of the day. So it’s actually much more aligned than I think virtually any other investment structure is.”
Hedge funds miss out ‘on some really smart kids’
Balyasny’s start in the hedge fund industry came after he read a newspaper ad that led to a job at Schonfeld Securities. While cold-calling and answering job ads worked for him, he said it is not a “scalable” method for students interested in careers in finance who want to break into the industry but have no connections.
“The industry misses out on some really smart kids,” he said.
It led him to launch the Atlas Fellows Program that offers scholarships and paid internships with financial services firms, including Balyasny, to students interested in careers in finance. The program has over 100 students and the first group will graduate next year.
And Balyasny is focused on talent at all levels. This year, his firm had 125 summer interns and is doing more recruiting for students straight out of undergraduate programs, Balyasny said.
Balyasny grew up in what was then Soviet Ukraine, and at age 7 in 1979 his family immigrated to the U.S. from Kyiv during a period of large-scale Jewish immigration from the former Soviet Union. They landed in Chicago not speaking any English. The immigration experience and early years in a new country built his resiliency, he said.
“It gives you a certain drive because you start without much, and everyone you know is in the same position,” he said. “And the only way you kind of get to a more a comfortable life where you’re not worried about how you’re going to pay the bills this month is you really have to step up and achieve something. So there’s like an inherent kind of drive and grit that is difficult to teach.”
And those lessons also translate to markets, Balyasny said.
“There’s a lot of times where whatever you used to do stops working. You have to figure it out, whether that’s somebody’s individual trading or building out a new business or a new strategy, or your overall fund ... they constantly need to be iterated and reinvented and approved. And you need a lot of perseverance to do that over, you know, many, many years.”
Russia’s February 2022 full-scale invasion of Ukraine created knock-on impacts across global energy and commodities markets. At the time, Balyasny Asset Management had a fairly new commodities business and Balyasny said there were opportunities due to wild moves and dislocations in commodities markets.
“I think markets have sort of gotten used to it,” he said. “We still do a lot of stress testing for various escalations … but now it’s less of an issue from the market standpoint.”
Balyasny, who no longer has any family in Ukraine, returned once about a decade ago for a visit with his family. Both he and his firm made charitable humanitarian donations at the outset of the war, he said.
He said his best guess to how the current war ends is that eventually a settlement will be reached.
The next 10 years
Over the next decade, Balyasny plans to build a more diverse firm.
“Today, I’d say we have a few top-notch businesses and a lot of newer businesses. And I think in 10 years, we want to be known as amongst the best in every strategy that we're in,” he said, pointing to equities and macro as established, mature businesses that make up two-thirds of the firm. Emerging strategies include commodities, systematic and equity arbitrage businesses, he said.
For some strategies, such as agricultural commodities for example, it is “very difficult to have an independent fund,” Balyasny said, pointing to the infrastructure, technology, data and weather teams needed as well as the volatility investors must tolerate.
“It’s just a very hard separate business. So strategies like that where there’s a lot of seasonality, right? There’s big chunks of the year where there’s just a lot less to do than other parts of the year,” he said, adding “when it's part of 170 teams, it’s great because it’s totally uncorrelated. You can allocate capital, more capital, when there's more opportunity.”
“We might make changes at the PM level. If somebody’s not performing for an extended period of time, we might make changes in the approach and iterate the strategy,” he said.
“But the only way you build a moat and really deliver consistent, high, Sharpe returns is you have to be in these businesses for decades, and you just get better and better at it every year. And they take a long time to really build a real competitive advantage in something.”
BAM now has 20 partners and Balyansy wants to add more over time.
At 52, Balyasny has no plans to slow down or retire.
“I foresee more senior folks running large portions of the business,” he said. “But I don't intend to go anywhere for a while.”